The FTSE 100 index of leading shares dropped by 93 points to 5882 during a morning in which large mining companies dominated the fallers. In Europe, Germany's Dax index lost 1.7% and the French CAC was down nearly 1.6% by midday.

Traders blamed the latest turbulence in the commodities market, where the price of silver tumbled by another 7%, and gold shed 1% to fall below $1,500 per ounce. Oil also fell again.

Analyst Joshua Raymond of City Index said: "There has been a move by investors to take some cash out of commodities and resource-related equities on demand fears."

Yusuf Heusen, senior sales trader at IG Index, agreed: "Investors seem happy to pull out of precious metals and hold onto cash for the time being."

Data released overnight showed that the output from China's industrial sector grew by less than expected in April, suggesting that the world's fastest-growing major economy is slowing down.

Jim O'Neill, chairman of Goldman Sachs Asset Management, said the data indicated that China would grow by 8% this year, versus more than 10% in 2010.

The Chinese government took further steps to cool the economy, raising the amount of money that its banks must keep in reserve. This is the fifth such increase in 2011, cutting further the amount of liquidity in the economy.

Commodity rollercoaster

Commodity prices have risen sharply since the global economic downturn ended, but in recent weeks analysts have been warning that the rally might have gone too far.

Silver has seen the strongest moves, soaring from $33 per ounce at the start of March to more than $49 per ounce at the end of April. This month, though, it has lost nearly a third of its value, hitting just $32.56 an ounce at one stage on Thursday. Gold prices have lost more than 5% in recent weeks, and City experts see little sign of the turbulence ending soon.

"The only thing we can be certain of in silver right now is that the rollercoaster journey is going to continue for some time," said UBS analysts.

Commodity prices also fell because the dollar strengthened, hitting a three-week high against a basket of major currencies. This pushed copper to a five-month low.

Oil bull run "could continue"

In its monthly report, the IEA said: "Persistently high prices at this stage of the economic cycle may ultimately sow the seeds of their own destruction."

It cut its estimate for global oil demand this year, predicting that US motorists would drive less than usual in response to petrol costing nearly $4 (£2.46) per gallon. It said: "We believe gasoline demand will indeed disappoint this year – rising seasonally but declining on a yearly basis if retail prices remain at current levels."

But despite seeing the oil price plunge by 10% last Friday, the IEA believes crude prices may climb again. "As the dust settles, prices have again begun to creep higher," the agency said. "The market bull run may have legs for a while longer."

The report sent the oil price falling by more than $2 a barrel, with US crude hitting $95.5 and Brent crude trading around $110.25.